This study attempts to enhance the understanding of the liability of foreignness in the context of venture capitalists, hereafter VC, investing in emerging markets, hereafter EM, by drawing on case evidence from five cases. The outcomes of the study aim to provide VCs with a deep understanding of the investment environment within EM to lower the perceived risks and facilitate investments.
The literature review revealed a lack of evidence for the main institutional pressures, their impact on VCs as well as the strategies used to mitigate the impact of the liability of foreignness.
The main finding of the study is that a liability of foreignness exists for VCs due to political, legal and cultural pressures as well as a home bias. This leads to an increase in transaction costs. Furthermore, differences in the governance codes and business practices made it difficult for VCs to gain legitimacy within the EM while complying with all the rules and regulations of their home country.
Furthermore, local adaptation through the establishment of local offices to gain access to local networks and resources was the favoured mitigation strategy of VCs. Superior firm resources were used to facilitate learning about the EM by attracting local entrepreneurs and leveraging the added value of such resources during negotiations. The relocation of the headquarters from a portfolio company operating in an emerging market to a developed country in order to access financial as well as human resources was identified as a new mitigation strategy.
Table of Contents
2 Introduction
2.1 Research motivation
2.2 Scope of the project
2.3 Study procedure
3 Literature Review
3.1 Internationalisation
3.2 Institutional theory
3.3 Liability of foreignness
3.4 Benefits of foreignness
3.5 Difficulties in internationalisation
3.6 Home Bias
3.7 Strategies to overcome LOF
4 Research Objective and Research Questions
5 Methodology
5.1 Case Study Method
5.2 Single or multiple case study approach
5.3 Sample Size and Selection Criteria
5.4 Data Collection
5.5 Data Analysis
6 Case studies
7 Cross-Case analysis
7.1 Drivers Africa
7.1.1 Institutional pressures
7.1.2 Home bias Africa
7.2 Drivers China
7.2.1 Institutional pressures China
7.2.2 Home bias China
7.3 Drivers India
7.3.1 Institutional pressures
7.3.2 Home bias India
7.4 Strategies Africa
7.4.1 Local adaptation
7.4.2 Exploitation of firm resources
7.5 Strategies China
7.5.1 Local adaptation
7.5.2 Exploitation of firm resources
7.6 Strategies India
7.6.1 Local adaptation
7.6.2 Exploitation of firm resources
7.7 Similarities and differences
7.7.1 Drivers
7.7.2 Strategies
8 Discussion and conclusion
8.1 Drivers
8.2 Home bias
8.3 Strategies
8.4 Implications
8.4.1 Implications for VCs
8.4.2 Implications for policy makers
8.4.3 Contributions to academic literature
9 Limitations
Research Objectives
This dissertation examines the phenomenon of the "Liability of Foreignness" (LOF) for venture capital (VC) firms investing in emerging markets (EM). It aims to identify the underlying drivers of this liability, understand its impact on investment decisions, and evaluate the strategies VC firms employ to mitigate these institutional and market-based pressures.
- Analysis of institutional pressures (political, legal, and cultural) influencing VC investments in Africa, China, and India.
- Investigation of the "home bias" phenomenon among VC investors.
- Evaluation of adaptation strategies vs. exploitation of firm-specific advantages to gain legitimacy in emerging markets.
- Identification of a new mitigation strategy: the relocation of portfolio company headquarters to developed countries.
Excerpt from the Book
7.1.1 Institutional pressures
General pressures. The political risk within Africa is high compared to the average risk in EM (BM 2015). VC 1 and 4 experienced political risks as they invested in Nigeria when elections were taking place. Due to the uncertain outcome and impact of the elections no company in the region was willing to take the risk of doing business:
BA 2: “First they had the presidential elections in Nigeria and then you had the parliamentary elections and the guys were just saying that all business is frozen for the period of elections, because no one knows what the outcome is.”
However, elections can promote FDI. Successful elections create a stable business environment and help in attracting new FDI from VCs since political risk is a main entry barrier to the African market (AVCA 2014b). The successful management of the elections in Nigeria created trust of VCs in the region:
C. Coleman, Head of investment banking for sub-Saharan Africa, Goldman Sachs: “These risks have been managed rather well and the single most important event in Africa this year has been the successful, peaceful transition from one president to another in Nigeria” (FT 2014).
Summary of Chapters
2 Introduction: Outlines the research motivation and the role of venture capital in transforming emerging markets, while highlighting the constraints of institutional voids and the liability of foreignness.
3 Literature Review: Reviews existing theories on internationalisation, institutional frameworks, the liability of foreignness, benefits of foreignness, and the home bias concept.
4 Research Objective and Research Questions: Defines the core goals of the study and the specific questions regarding why VCs face LOF, its impacts, and how it is overcome.
5 Methodology: Details the qualitative, multi-case study approach, including data collection via in-depth interviews with industry experts and triangulation with secondary sources.
6 Case studies: Provides an overview of the five selected firm-specific cases used for the empirical investigation.
7 Cross-Case analysis: Compares the institutional drivers and mitigation strategies across the regions of Africa, China, and India.
8 Discussion and conclusion: Synthesizes the findings, discusses the implications for VC managers and policymakers, and outlines contributions to academic literature.
9 Limitations: Acknowledges the constraints of the study, such as its qualitative nature and the geographical focus of the sample.
Keywords
Venture capital, Business angel, Legitimacy, Liability of foreignness, Isomorphism, Home bias, Internationalisation, Emerging markets, Institutional theory, Institutional voids, Transaction costs, Foreign direct investment, Local adaptation, Firm resources.
Frequently Asked Questions
What is the core focus of this dissertation?
The work focuses on the "Liability of Foreignness" (LOF) as it applies to venture capital firms operating in emerging markets, identifying how institutional voids influence their investment behaviour.
What are the central themes of the research?
The research centres on institutional theory, internationalisation, home bias, and the strategic measures VCs take to mitigate risks associated with operating in culturally and legally distant markets.
What is the primary objective of this study?
The primary objective is to develop a deep understanding of the LOF phenomenon in the VC context by analysing the experiences of industry experts and identifying recurring patterns in their strategies.
Which scientific methodology is utilised?
The study employs a qualitative, multiple case study approach, conducting in-depth interviews with five industry experts, supplemented by secondary data from newspapers and financial databases.
What does the main body of the work cover?
It covers a review of relevant literature, the research design, and a detailed cross-case analysis of institutional pressures and coping strategies in Africa, China, and India.
Which keywords define this research?
The core keywords include venture capital, liability of foreignness, home bias, institutional theory, emerging markets, and local adaptation strategies.
How does political risk specifically affect VC firms in emerging markets?
The study notes that political risks, such as election cycles, often freeze business activity due to uncertainty, but can also foster confidence if transitions are peaceful and lead to stable business environments.
What is identified as a new mitigation strategy for VCs?
A novel strategy identified is the relocation of the portfolio company's headquarters from an emerging market to a developed country to access better financial and human resources.
How do VCs gain legitimacy in a foreign market?
VCs typically gain legitimacy by establishing local offices, building governmental relationships, hiring local staff, and leveraging local networks to navigate informal institutions and business practices.
- Quote paper
- Tim Schreier (Author), 2015, A liability of foreignness for venture capital firms investing in emerging markets. A case study approach, Munich, GRIN Verlag, https://www.grin.com/document/999705
